Barclays Drops ABN Bid, Clearing Way for Royal Bank

By Ben Livesey and Jon Menon

Oct. 5 (Bloomberg) -- Barclays Plc abandoned the six-month battle to buy ABN Amro Holding NV after investors failed to back its bid, clearing the way for Royal Bank of Scotland Group Plc and two partners to complete the biggest banking takeover.

Royal Bank, Banco Santander SA and Fortis are set to pay about 71.8 billion euros ($101.6 billion) for ABN Amro, the most ever for a bank. Royal Bank's stock has fallen about 15 percent since April 25, when the banks offered to buy ABN Amro, compared with a 6.3 percent decline in the FTSE 350 Banks index.

``Barclays is admitting defeat, but they are not damaged,'' said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London who has a ``neutral'' rating on the stock. ``Royal Bank is not buying ABN on the cheap.''

Barclays dropped out after investors in Amsterdam-based ABN Amro, the largest Dutch bank, tendered only about 0.2 percent of their shares to its bid. London-based Barclays's offer was 14 percent below that of Edinburgh-based Royal Bank, Santander of Spain, and Fortis.

Barclays's shares rose 5 pence, or 0.8 percent, to 660 pence in London. The bank will buy back as much as 1.55 billion pounds ($3.16 billion) of its stock for cancellation by the end of the year. Royal Bank shares gained 1.2 percent to 569.5 pence.

``We have noted Barclays's announcement and we fully understand their position,'' said Neil Moorhouse, an Amsterdam- based spokesman for ABN Amro. Royal Bank spokeswoman Carolyn McAdam declined to comment.

`Paying Too Much'

Royal Bank, Santander and Fortis, based in Brussels and Utrecht, the Netherlands, plan to carve up ABN Amro. Royal Bank will take the investment-banking and Asian consumer businesses, while Santander will expand into Italy and double its market share in Brazil. Fortis, the largest Belgian financial-services company, will get the Dutch consumer-banking arm and ABN Amro's asset-management and private banking units.

The trio will pay about three times ABN Amro's book value, data compiled by Bloomberg show, higher than the multiple of 2.35 that JPMorgan Chase & Co. paid in its $58 billion acquisition of Bank One Corp. in 2004, the second-largest banking takeover after this deal.

The takeover battle began when mergers and acquisitions globally were running at a record pace, and ends at a time when takeovers have slowed amid turbulence in credit markets and concern economic growth will dwindle.

``Royal Bank and Fortis are probably paying too much,'' said Joost de Graaf, who helps manage about $1.1 billion, including ABN Amro and Barclays stock, at Kempen Capital Management in Amsterdam. ``They will have to work very hard to generate the required returns on their investments.''

`Opportunity' to Quit

Some investors question whether Royal Bank Chief Executive Officer Fred Goodwin should have pushed on with the purchase after losing out on LaSalle Bank, the Chicago-based unit ABN Amro sold to Bank of America Corp. for $21 billion in cash.

``Once LaSalle was not part of the transaction, that was the opportunity for Royal Bank to say it didn't make sense to continue,'' says Robert Talbut, chief investment officer at Royal London Asset Management, which oversees $63 billion, including Royal Bank shares.

Royal Bank, which is paying about 16 billion euros of ABN's Amro's total takeover price, has said it can deliver 1.8 billion euros in revenue gains and cost cuts by the end of 2010 by combining its investment bank with that of ABN Amro. Royal Bank's securities unit increased pretax profit by 19 percent to 2.2 billion pounds in the first half.

Subprime Impact

The collapse of the U.S. subprime mortgage market has ravaged results at some of the world's biggest financial companies. New York-based Merrill Lynch & Co., the world's largest brokerage, will report its first quarterly loss in six years and today said the outlook for the current period is difficult to predict amid ``continued challenges'' in credit markets.

UBS AG, based in Zurich, said on Oct. 1 it had a quarterly loss after $3.4 billion of writedowns on fixed-income securities. New York-based Citigroup, the biggest U.S. bank by assets, said third-quarter earnings would drop about 60 percent.

Goodwin will also get ABN Amro's Asia unit, which has 152 branches and more than 17,700 employees. Asia produced 289 million euros of ABN Amro's pretax operating profit in the first half, more than double the year-earlier period.

Breakup Fee

``Asia has got strong growth prospects and it's an under- penetrated market,'' said David Dodds, an investment analyst at SVM Asset Management in Edinburgh, who helps manage $1.2 billion including Royal Bank stock. ``It would be a mistake to miss out on Asia for a global banking group like Royal Bank.''

The failure to win ABN Amro leaves Barclays CEO John Varley's strategy of increasing earnings growth and reducing dependence on securities trading unfulfilled. ABN Amro would have doubled Barclays's consumer banking revenue and given the company new operations in markets from Brazil to India.

Varley, 51, said in a statement he's confident the bank's ``strong momentum will continue to deliver significant growth.''

Barclays agreed to buy ABN Amro on April 23, and sweetened the bid in July by adding cash after the Royal Bank group made a higher offer.

Falling Share Price

Barclays's prospects got a boost on July 13 when a Dutch court decided to allow ABN Amro's planned sale of LaSalle to Charlotte, North Carolina-based Bank of America Corp. over the objections of the Royal Bank-led group. Goodwin, 49, had been seeking to buy LaSalle to expand his own operations in the U.S.

Varley also sold stakes to Singapore's Temasek Holdings Pte and China Development Bank to raise cash, gain partners in Asia and boost the offer's allure to investors. Barclays President Robert Diamond, 56, predicted on July 23 that the investments by China and Temasek, together with rising earnings, would lift Barclays's share price and the company's bid.

It didn't work out that way. On July 30, ABN Amro dropped its support for Barclays's offer. Barclays's plan further unraveled as its share price dropped as much as 15 percent since Aug. 1, hurt by concern the collapse of the U.S. subprime mortgage market would spur losses at its investment banking arm.

The bank's mostly stock offer valued ABN Amro shares at 33.27 euros each at the close of trading yesterday, below the offer of 38 euros a share from the Royal Bank-led group. ABN Amro shares were suspended after the Royal Bank offer expired at 3 p.m. Amsterdam time today.

Cash Is King

Royal Bank and its partners can still pull out of the deal if they fail to gain 80 percent of ABN Amro's stock, though analysts say that's unlikely to happen.

The Royal Bank-led offer contains 93 percent cash, while the Barclays bid included a cash component of 37 percent and the rest in shares. Investors frequently prefer bids with a greater proportion of cash because they are perceived as less risky.

``The acquisition price would have been very high in the current market environment, so maybe one should be happy that the deal fell through,'' said de Graaf.

Barclays said the 200 million-euro breakup fee it will receive from ABN Amro will ``significantly exceed'' the costs it incurred in connection with the offer.


Source: Bloomberg.com